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Non-Profit Student Loan Scandals

Earlier this week we urged lawmakers not to put non-profit student loan providers on a pedestal. After all, these agencies are no strangers to scandal.

In our earlier post, we wrote about the central role a group of these nonprofit lenders played in devising and carrying out the 9.5 student loan scandal. Today, we're going to take a closer look at misdeeds that have occurred at individual agencies over the last several years. In case after case, the leaders of these companies appear to have lost sight of their agencies' missions -- acting more like high-rolling executives at for-profit corporations than the leaders of tax-exempt public-purpose organizations.

Here are five such cases:

Iowa Student Loan Liquidity Corporation

The chief executive officer of Iowa's nonprofit student loan company, also known as ISL, has not been shy about his ambitions for the agency. In an internal company e-mail obtained by The Des Moines Register in 2007, Steve McCullough wrote that his aim was to achieve "continued 'hypergrowth" by pursuing "an aggressive, offensive strategy to bring in new loan volume."

A report released last fall by Iowa's Attorney General Tom Miller demonstrates how ISL officials carried out this strategy. According to the report, the agency's leaders pursued a concerted strategy to steer students in the state to its most expensive private student loan products. Among other things, the AG found that ISL had provided kickbacks to colleges that recommended its private "Iowa Partnership Loans" to their students; gave financial rewards to their employees based on the number of private loan borrowers they secured; paid bonuses to staff members at the college access centers they managed based on the number of borrowers they brought in; falsely advertised its private loan products as the "lowest cost" options available; and routinely failed to advise students and their families to exhaust their federal student loan eligibility before taking out private loans. [The Iowa agency also was an aggressive participant in the 9.5 student loan scheme, a fact that was not mentioned in the report.] In a statement responding to the report, agency officials did not dispute any of the report's findings but instead took solace in the fact that the AG had not found them guilty "of mismanagement,misappropriation of funds, or criminal conduct."

It's no coincidence that Iowa students graduate with the highest level of debt in the country. The AG concluded that the loan agency's leaders had "unduly elevated the goals of increasing its competitive advantage, market share, and loan portfolio size over its mission of always striving to do the best for its student borrowers."

The Pennsylvania Higher Education Assistance Agency

The Pennsylvania loan agency, known as PHEAA, was the largest nonprofit lender that participated in the 9.5 student loan scheme. Between 2002 and 2006, PHEAA made 9.5 claims on between $1.2 billion and $2 billion each year.

While the agency spent much of the money it earned on grants, scholarships, and loan forgiveness programs in Pennsylvania, PHEAA executives used a substantial share of the proceeds, according to The Chronicle of Higher Education, to "embark on a spending spree" and to woo college financial aid administrators. Expense reports that PHEAA was forced to release in March 2007 in response to an open records request, revealed that the agency had spent more than $860,000 at eight high-priced resorts for retreats held over a five year period. At these retreats, they lavished money on board members for falconry lessons, cigars, limousines, and spa treatments.

PHEAA's leaders also rewarded themselves with enormous bonuses. For example, Richard Willey, the agency's chief executive, received an $179,000 bonus in 2007, bringing his total compensation to $469,000 that year. Meanwhile, a report by the Pennsylvania state auditor in the summer 2008 described bloated compensation packages for PHEAA executives and board members, including salaries of more than $164,000 paid to 12 executives and an all-expense-paid trip for employees and their families to a local amusement park.

Management at PHEAA appears to "have become distracted by the rewards of being PHEAA 'executives' rather than public servants for the Commonwealth of Pennsylvania.," the state auditor concluded.

Kentucky Higher Education Student Loan Corporation

The Kentucky student loan agency, known as KHESLC, was one of the most aggressive participants in the 9.5 student loan scheme. Over the course of four days in January 2004, KHESLC's leadership engaged in a massive loan and bond refinancing and recycling project so that the agency could claim 9.5 subsidy payments on "nearly all of its loan portfolio," according to a recent report by the U.S. Department of Education's Inspector General (IG). The IG estimated that between 2004 and the end of 2006, the Kentucky agency overcharged the federal government more than $80 million.

KHESLC officials used a share of the funds they obtained through this risky scheme to finance its popular "Best in Class" loan forgiveness program, which was designed to encourage students to pursue careers as teachers. But in January 2007, Education Secretary Margaret Spellings put a stop to the 9.5 scandal by barring lenders who refused to submit to independent audits -- like KHESLC -- from receiving any further 9.5 payments. As a result, the loan agency was eventually forced to pull the plug on the loan forgiveness program, leaving thousands of newly-minted teachers in the lurch -- deeply indebted with loans they never expected to have to pay off.

"The loan forgiveness played a large role in me deciding to go into this field," Travis Gay, a special education teacher, told the Lexington Herald-Leader. "I paid for my entire master's degree out of the program, books and all, and so did my wife. We were told, ‘It's something you can count on.' But then it was gone."

The South Carolina Student Loan Corporation

According to a recent Higher Ed Watch investigation, the student loan agency in South Carolina, known as SCSLC, seems to have used its ties to the state guaranty agency to obtain excessive taxpayer subsidies from the federal government. The loan agency appears to have done this by helping the guarantor exploit an emergency program the government has in place to ensure that all eligible students are able to obtain federal student loans.

The federal lender-of last-resort program is administered by the designated guaranty agency in each state to provide government-backed loans to students whose applications have been denied by other lenders. Since the agency must give all  borrowers who qualify for this program a loan, the federal government takes on all the risk associated with the debt. This means that holders of these loans are reimbursed for 100 percent of any losses sustained due to borrower default, as opposed to ordinary FFEL loans, which are reimbursed at a 97 percent rate.

Most guarantors use this program only in rare cases. But as Ben Miller at Higher Ed Watch reported, the rate that the South Carolina guarantor used this program to request reimbursement from the Department was at least 100 times greater than for any of the other 9 guaranty agencies he had reviewed, including the largest guarantors in the country.

What makes this case especially intriguing is that SCSLC effectively runs the operations of the guarantor, making it easy for the agency to carry out such a scheme. Here's what we think is happening: SCLSC is denying the loan applications of financially needy students at an unusual frequency. Under SCLSC's lender-of-last resort plan, a single denial makes the students eligible for a lender-of-last-resort loan through the South Carolina guarantor. That agency, in turn, conveniently contracts with SCSLC to provide that loan. Denying students' FFEL applications and shifting them into the lender-of-last resort programs would be a worthwhile endeavor for SCSLC because it allows the agency to reduce the risk in its portfolio, obtain higher federal reimbursement payments than it otherwise would receive, and, make its loan assets more attractive to potential investors because they carry a 100 percent government guarantee.

The Department of Education is carrying out its own investigation of these allegations and is expected to issue a report on them soon.

The Connecticut Student Loan Foundation

The student loan agency in Connecticut, known as CSLF, has been in turmoil ever since the details of a report by the state auditor began to emerge several months ago. The audit found CSLF officials had engaged in lavish spending on salary compensation and other perks at the same time that the agency was operating tens of millions of dollars in the red and laying off employees (as well as allowing its pension fund to run dry).

"Despite the negative cash flow," the Hartford Courant reported, "the foundation spent $4,459 for a holiday party in 2006 for the board of directors and managers at Portofino's Restaurant and spent $1,884 to hire four limousines to take certain board members to the party."

"Auditors also criticized the foundation for spending $6,850 for club seats to the UConn football season, paying monthly dues to the Tournament Players Club golf course in Cromwell, paying $1,378 toward the cost of a retirement party for the financial aid director at Eastern Connecticut State University and spending $650 for Big East Basketball tournament tickets and $1,100 to sponsor a foursome in the Notre Dame Golf Open."

Ever since the details of the state audit became public, almost all of the foundation's board members have resigned. And this month, the remaining board members fired the agency's president Mark Valenti for cause after they discovered that he had ordered the human resources department  to start making six-figure severance payments to him.

"Executives at the Connecticut Student Loan Foundation -- the state chartered nonprofit group that guarantees and finances loans -- have behaved like masters of the universe on Wall Street," Rick Green, a columnist for the Hartford Courant, wrote in May.

These examples show how non-profit loan agencies have strayed from their missions. We're not saying that these companies are any worse than their for-profit rivals. But we're not so sure that they are that much better either.


I can only assume that the author of this blog has concluded that Congress will adopt changes to the Obama student loan proposal to include a role for non-profit lenders and state agencies. Why else has the stream of attacks on these entities--all of it recycled material--been stepped up?

The question that should be raised is whether borrowers will benefit by having non-profit lenders, state agencies and guaranty agencies involved in the federal student loan program. If the answer is yes, these entities should be given a role, especially if budget savings are not adversely impacted. If the answer is no, they shouldn't get a future role. The decision should be made on the basis of this question rather than on "mud" dredged up in a none-too-subtle attempt to deter policymakers from even looking at the real issues.

As I have said previously, if this site wanted to contribute to good public policy, it would attempt to address issues rather than to throw mud.

While I agree that certain

While I agree that certain entities make a real difference and fulfill their roles as not-for-profits, it is also appropriate to highlight those who go astray. The sad part of almost any story is the average worker who comes in every day and believes in what he or she is doing and tries hard to make a difference in the life of a kid trying to pursue the college dream. Unfortunately, leadership at the company's highlighted on this blog and elsewhere get greedy, arrogant or worse and tarnish the work of the real heroes. I'm still in shock over some of the salaries of some of these so-called non-profit CEOs highlighted in a prior blog. I believe in the free market, but running a guaranty agency or a non-profit bank is far from being part of a competitive free market. I say, keep the articles coming. The public, and the Congress -- has a right to know.

Default rates

For some reason these statistics are never brought into the discussion. While some state guarantee agencies are rightfully condemned for their greediness, there are dozens of others who are doing their job correctly. Consider UHEAA, whose borrowers default at a rate of 2.1%. What's the Direct Loans rate? Around 6%? There is definitely a difference in the default rates between the FFELP and the Direct Loan program.


Yes, there is a difference. The DL rates are lower than the FFEL rates. Guarantor rates are not at all analogous to school rates or loan program rates. It could even be argued that one guarantor cannot be compared to another guarantor using this method. The reason is the difference in the way consolidation loans are treated for guaranty agency rate purposes. (Note that loan consolidation was quite heavy right up through all the measured default periods and that some guarantors were net gainers of borrowers while others were net losers of borrowers.)

If a consolidation loan is made prior to the end of the cohort period (even on the last day), then the borrower is counted in the denominator of the consolidating agency’s cohort default rate. In the unlikely event that the consolidation loan then defaults before the end of the cohort period, the borrower would also be counted in the numerator of the consolidating agency’s cohort default rate. In general, though, guarantors that are net importers of consol borrowers get "free extra weight" in their denominators, while guarantors that are net exporters of consol borrowers are "robbed" of denominator weight and thus see their "default rates" artificially inflated by this method, all other things being equal. http://www.ifap.ed.gov/drmaterials/attachments/FY05Cohortguide2a.pdf.

Consolidation availability and volumes have dropped, so these types of impacts may change with the 2009 or 2010 default rates, which won't be available for several years.


2.1%? 6.0%? Actually, the REAL lifetime default rate, as per ED OIG, is about 30%. The orange book cohort numbers are statistically dishonest, and the student debt cartel, including their friends and business partners at OPE/FSA, are well aware of this.

Real default rate 15%

The orange book is Perkins loans, which are different from FFEL/DL and have much higher default rates than FFEL/DL. The FFEL/DL cohort numbers, though, are artificially low due to changing the definition of default from 120 days to 360 days during the 1980s and 1990s while keeping the default measurement period at only two years. But where does OIG ever say 30%? http://www.ed.gov/about/offices/list/oig/auditreports/a03c0017.pdf . This is a myth. They never come close to saying that. In addition, they are looking at a different era -- the mid-1990s, when default rates were much higher than today. The "high" rates in there were not calculated by OIG. They are lifetime default guestimates by OMB made two years before the loans are even originated. So, a projection is a little bit off. Happens all the time. And not just in student loans. Three years ago what did the government estimate that the unemployment rate, prime rate and mortgage foreclosure rate would be in 2009? How accurate were those estimates?

New Numbers Needed

Craigie: looking at Appendix A of that publication suggests gross dollar default rates over the lives of the loans for several different cohorts. One would have to do some interpolation to come to an overall rate, but thirty percent is not far off for the rate in terms of dollars. As you note, these rates are out of date. The Department of Education should publish the latest estimates so that we are all on the same page with updated numbers.

The Department's release last year was helpful in showing that the dollar default rates over the lives of the loans for five more recent cohorts averaged forty percent for proprietary school students. EdSector has likewise published some disturbing new numbers for various categories of students at the ten-year mark, such as a nearly forty percent rate for Black, non-hispanic borrowers at all institutions.

None of these numbers includes private, alternative loans. Someone should try to combine the numbers to get the whole picture. Happy talk about loans in the Chronicle and especially the self-serving pronouncements from the College Board are not credible. The College Board was until recently a lender itself, affiliated with Sallie Mae, and has been a leading enabler of the move to merit aid, leaving many students with no choice but to borrow.


There has never been anything actual historical released containing dollars. Anything with dollars that has been published has been a projection generated before the loans are issued. (The projections are however based supposedly on the best available historical info but of course then are always lagging the reality of the loan market, including changes in legislation, by a few years.)



At least until the credit bubble of the 2000s, private alternative loans were only available to undergraduates with co-signers, generally at elite colleges, and graduate & professional students. Both groups have had extremely low default rates. Unfortunately First Marblehead supposedly possesses the most extensive historical database of alternative loans but says it is proprietary information. With the credit revolution ("bubble") this decade, private alternative lending was loosened up quite a bit but was still FICO-based. The few alternative lenders that are required to issue SEC reports have been disclosing larger and larger charge-offs for private alternative loans, suggesting that they got too loose with their underwriting a few years earlier. It is also possible that they tightened up their lending far too much in 2008 as an overreaction/over-correction.

Time to remove the PROFIT from student loans.

I think it is becomming quite clear to many, that greedy profits are what has created the student loan mess we now have. The history of student loan industry since 1970 is driven by greedy profiteers that wanted to, and found a way to exploit students.

It is high time we remove profit from the student loan industry. If government is going to loan directly, why not loan the same money with the condition that the student pay back what they borrowed and not 1 cent of interest, or penalties, and a absolute minimum of a processing fee to be not more than 2 percent total of the loan.

This system will help everyone. Those in default will finally see a way out of debt. Those with huge debts will also see a way out, and those just entering the system will not have to run the gauntlet that previous students have.

And doing so will also help restore consumer protections on student loans.


Can you please do an expose of the cosy relationship beteween TERI, aka The Education Resources Institute--a supposedly "non-profit" guarantor of private student loans and the for-profit First Marblehead Corporation? Its ironic that TERI would take advantage of the Bankruptcy Code to hide from its creditors, while it--and its partner First Marbelehead--have thrived for years on the non-dischargeability of student loans in bankruptcy. Quite ironic isn't it?

"Non-profit" hotel is the Ritz-Carlton???

Mr. Burd - you forgot the best example of the irony of the so-called "non-profits." Apparently every other meeting room in America was booked, so the trade association of "non-profit" student loan providers had no choice but to meet at the Ritz-Carlton hotel.

Since the conference was last week, here's a link to registration information:


And here is a link to the Ritz-Carlton hotel that the "non-profit" student loan providers met at so we can all see what we missed!


Student Loan reform badly needed

The entire industry is corrupt, thanks to Congress. We badly need to restore basic consumer protections to student loans. I borrowed nearly $65,000 for my education. Over the last 8 years I've repaid over $100,000, yet my lenders (mainly Sallie Mae) claim I still owe more than $175,000. At this rate I'll spend the rest of my life working to pay this off, and never will be able to. Explain to me how society benefits from Congress creating a permanent class of indentured servants?

Return Standard Consumer Protections to Student Loans

Standard Consumer Protections need to be returned to Student Loans. In 1992 I had $22,000 in loans due, after paying off a $4000 loan (for which I ended up paying approximately $7000). At the time, I thought I did everything right--and everything I was advised to do by my bank. I deferred my loans when I could not immediately get a job and then was advised to consolidate. Very quickly the loans snowballed, penalties and fees were rolled into the principle. I now owe more than $100,000 with no end in sight. The amount I could afford to pay each month does not even cover the accrued interest (8%). I have legal representation; at every turn we have been stonewalled--collection agencies contracted by the Dept. of Education would rather see your debt continue to rise than to negotiate a payment (so they can add more fees and the loan will be worth more when they re-sell it to the next debt collector). At one point a snotty collections worker said over the phone, "Just send a check for $80,000 and you won't have any more problems." Ah, if only it were so simple.
This is my only debt; it is not the result of living a lavish lifestyle. In hindsight, I tried to do the right thing; I still have every intention of paying back what I borrowed. Ironically, if I took advantage of all the junk mail offers for free credit cards and used their cash advances to pay off these loans years ago, I would be much better off today---at least credit card debt can be negotiated and/or resolved in bankruptcy.

Interest rates... non-profit vs. profit... DL vs. FFEL...REALLY?

It's interesting reading everyone's comments and I can honestly say most of you do have a good grasp of this industry. That said, there could be much debate over which program might be more affordable for students or taxpayers, unfortunately, this debate will never be heard in congress... but that's another story. Shouldn't the real question be "Why has the cost of attendance grown by such an alarming rate at these schools over the years?" Shouldn't we be pointing our fingers at the schools for increasing tuition by 6-10% each year?? Having a debate over an interest rate that might save a borrower 50-75 basis points over the life of the loan, or several hundred dollars in finance costs, seems like such a silly argument.

I have a one year old and am fortunate enough to have just started a 529 plan. My wife and I have worked hard to get the savings we needed to get this plan started, and with any luck it will help pay for our child's education at some point in time. If we need to take a loan then I'm not necessarily concerned with who I have to pay back or if I'll save myself a few bucks on the interest rate... no, no... my biggest concern is what is the cost of attendance going to be at the college he decides to attend. Do you know that if a school is currently charging $40K for the COA(cost of attendance), increases their tuition by just 6% each year, then in 18 years that FIRST YEAR will cost $117,470!!!!!

One more quick question - The gov't now runs the auto industry, banking, student loans and coming soon - healthcare. Can you say socialism??

Don't Count on Your 529

Big Brother: Why do you assume that the 529 plan you have started will help your family pay for college? There is no such requirement in law or regulation.

Suppose your child is enthusiastic about attending a certain college, but the college is somewhat less eager about that prospect. The college will use the "admit-deny" strategy, in which your child is admitted but denied a decent financial aid package. The college will use your family's 529 savings to reduce its own institutional aid rather than reducing your family's need to borrow, thus increasing your net price and perhaps successfully discouraging you.

Your child may enroll anyway, but the college will not tell you about this money-laundering practice, because it will claim protection of its "proprietary" information. It will tell you with a straight face that your 529 savings are helping to pay for your child's education, but in reality those savings may be paying for a much better financial package for someone else's child whom the college thinks is more desirable than yours, or for a nice bonus to its clever Vice President for Enrollment Management.

If you think that won't happen because colleges will in the future have to be more transparent and reveal their true prices to prospective students through net price calculators, think again. The Department of Education is poised to drop "merit" aid and other such euphemistic descriptions of these money laundering processes from being reported.

Actually, there is a legal requirement already on the books, in both law and regulation, which requires colleges to reveal the methods they use to determine the levels of all aid in a student's financial aid package. That is the Student Right to Know Act, but so far, no Secretary of Education has had the fortitude to enforce it. Meanwhile, American higher education under this generation of "leadership" falls further behind in the world as we move huge amounts of resources under the cover of proprietary information toward college vanity expenditures, apparently without end.

Address the REAL problem.

The federal student loan system has become fundamentally predatory due to the Congressional removal of standard consumer protections, combined with congressionally sanctioned collection powers that are stronger than those associated with all other loan instruments in our nation's history. These actions by Congress have, predictably, created an inherently predatory, state-sponsored lending and collection system where the motivations of the various functional elements of the system are fatally misdirected. The system that has resulted promotes inefficiency in administration, unchecked inflation, bureaucratic malaise and conflicted oversight. Moreover, the resulting system promotes needless and expensive complexity and redundancies, fails to encourage academic excellence, and ultimately, promotes delinquency and default.

While this system has been extremely lucrative for a few individuals, it causes massive harm not only to borrowers and their families, but also to non-borrowing students and their families, due to the dramatic inflation that the system promotes. The nation suffers a massive cost due to the large amount of wealth trapped in this system, the quality of the education received by the citizens, and the public's opportunity cost associated with the materialistic career paths that citizens are forced into at the expense of public interest work, and entrepreneurship.

Importantly: this problem exists across both Direct Loan (DL), and Federal Family Education Loan (FFEL) Programs. In the public interest, the consumer protections that were removed by Congress must be restored by Congress at the earliest opportunity. By returning these consumer protections, the motivations of the system's functional elements will be reoriented such that most, if not all of the deficiencies mentioned above will go away over time.

The Proof:

Congress removed bankruptcy protections, refinancing rights, statutes of limitations, truth in lending requirements, fair debt collection practice requirements (for state agencies) and even removed state usury laws from applicability to federally guaranteed student loans.
Congress also gave unprecedented powers of collection to the industry, including wage, tax return, Social Security, and Disability income garnishment, suspension of state issued professional licenses, termination from public employment, and other unprecedented collection tools that are used against borrowers for the purpose of collecting defaulted student loan debt. Concurrently, Congress established a fee system for defaulted loans that allows the holders of defaulted loans to keep 20% of all payments from borrowers before any portion of the payment is applied to principal and interest on the loan.

While this fee system has provided a massive revenue stream for a shadowy, nationwide network of politically connected guarantors, servicers, and collection companies who have greatly enriched themselves at the expense of misfortunate borrowers, it has caused immeasurable damage to millions of borrowers and their families, who see what started as an unmanageable debt become a financial cataclysm- that debilitates, marginalizes, and ultimately relegates them to a lifetime of financial servitude and despondency in many cases.

Analysis of IRS 990 filings of federal student loan guarantors proves without doubt that the income derived through this fee system is vast, as evidenced by not only the income of the guaranty agencies, but also by the salaries, bonuses, and perks taken by the executives who run them. This fee system is, indeed, the lifeblood of these organizations, who derive at least 60% of their operating income through this legalized wealth extraction mechanism. Clearly, it is in the guarantors financial interest that students default on their loans. If there were no student loan defaults, the guarantors would barely exist.

Additionally, it is often in the financial interest of the lenders that students default. Large lenders, most notably Sallie Mae, derive income from not only lending and servicing operations, but also from guaranty, and collection assets owned by the company. This leads to the common situation where a defaulted loan is paid in full to the lender, becomes vastly inflated with collection costs, and then becomes a revenue stream for the guarantor and collection company...all owned by the very same lender! A defaulted loan clearly can produce far more revenue for the system. It is obvious that this structure gives the lender/guarantor/ collector entities a perverse incentive to default loans rather than providing customer service aimed at helping the borrower avoid default.

Indeed, Sallie Mae's own annual reports provide compelling evidence of dramatic profiteering from defaulted loans: In the 2003 annual report, Sallie Mae CEO Albert Lord brags to shareholders in his opening remarks that the comany's record earnings that year were attributable to collections on defaulted loans. The company's "fee income" increased by 228% between 2000-2005, while their managed loan portfolio grew by only 87% during the same time period. Further there is clear evidence that Sallie Mae, and other loan companies actually defaulted student loans without even attempting to collect on the debt! In fact, Sallie Mae paid $3.4 million in fines as a result of the U.S. Attorney's office discovering that the company was invoicing for defaulted loans where the borrower was never contacted. Rather, records were fabricated to indicate that the borrower had been contacted. Similar cases were settled with Corus bank and Cybernetic Systems.

Taken together, these cases show irrefutably that there is indeed an interest to default student loans. Further, an employee of the Kentucky Higher Education Assistance Authority, KHEAA, came forward to StudentLoanJustice in 2007, and submitted that the agency managers had purposely marketed loans to poor, disadvantaged communities in the expectation that these citizens would default on their loans, thus be "on the hook" for the fees and penalties that would result-extractable through garnishment of the income sources mentioned previously. The harm this predatory activity has caused borrowers is severe, extreme, and widespread. citizens with defaulted loans have been documented fleeing the country solely as a result of their student loan debt. Others (many others) have been forced "off the grid". Some have even taken their own lives.

There is $40 billion in outstanding student loan debt in the U.S. covering upwards of 5 million loans. Finally, and most importantly, it was reported in January 2004 by John Hechinger (WSJ) that for every dollar paid out in default claims, the Department of Education would recover every dollar in principal, plus almost 20% in interest and fees. Whether this net positive collection rate can be counted as "profit" by the federal government is subject to debate, but at the minimum, it can be said that the federal government is breaking even, overall, on its defaulted student loan portfolio.

Therefore, all entities involved: The lenders, the guarantors, the collection companies, and even the Department of Education, have a perverse incentive for student loans to go into default- solely due to the fact that the borrower has none of the standard consumer protections available to him that exist for all other types of loans in the country. The result of this wrongly motivated system: despite repeated claims by the Department of Education, the student lending industry (andtheir army of lobbyists), and the universities that defaulted loans rates are at record lows, a 2003 IG report estimated that between 19% and 31% of 1st and 2nd year students would be put into default during the life of their loans. For community colleges, the range was between 30% and 42%, and for for-profit schools, was between 38% and 51%

This is a default rate that far exceeds that of any other type of loan. It is perhaps a conservative statement to say that ultimately, About 1 In 3 undergraduate student loan borrowers will default on their loans. This is an extremely high rate that the Department of Education, lenders, and universities are loathe to acknowledge.

With regards to bankruptcy: There was no basis for removing Bankruptcy protections from student loans in the first place. In fact, it was found that when student loans were treated the same as all other loans with regards to bankruptcy discharge, far less than 1% of federal loans were discharged this way. According to one congressman at the time, the widely advertised accounts of students filing for bankruptcy promptly after graduation was a crisis that existed "only in the imagination". Congress created this artificial, structurally predatory, cruel and unusual lending and collection system. Congress, must therefore assume the the immediate responsibility of fixing it by returning the standard consumer protections that should have never been taken away in the first place. Insodoing, The federal government will, once again, have a financial interest that student loans not default.

This will compel the government to use its considerable influence to compel the universities- in a serious and meaningful way- to both provide a quality education that gives the student the best chance for success, and also to do this at a reasonable cost. Certainly, new methods for encouraging students will result. This will also compel the government to take seriously its oversight role over private lenders (assuming that private lenders will participate in federal student loan programs in the future). While this "good government" model may be frowned upon by current staff at the Offices of Federal Student Aid who have grown comfortable with their conflicted, bureaucratic roles, this is only clear evidence that these individuals are ill-suited for the new model of operations. It is likely that there is an abundance of properly motivated people willing to take over in this case, and at long last, provide inspired service that will ensure the success of the model.

Bravo, Mr. Collinge. Very

Bravo, Mr. Collinge. Very well said!

Thank you.

I have worked for a

I have worked for a non-profit student loan organization for several years. Here's the other side of the story....

President Barack Obama’s $3.6 Trillion Fiscal Year 2010 budget outline calls for the elimination of the Federal Family Education Loan Program (FFELP). Under the proposal, all student loans originated in Academic Year 2010-11 and thereafter would be made through the William D. Ford Federal Direct Loan Program (DL).
Unintended Consequences for Students, Schools and Taxpayers:
The Administration’s proposal to eliminate the private-sector based student loan program and to finance all student loans directly through the Federal Government via the issuance of U.S. Treasury debt is not in the best interest of students, schools or taxpayers.

For over 40-years, FFELP has fostered access and opportunity in American higher education. It has offered to students and schools choice and competition among student loan providers, as well as essential value-added benefits such as college outreach, debt management and financial literacy.

Not only would a transition to one-hundred percent DL cause the loss of these benefits, but it would dramatically increase the Treasury debt at a time when outstanding public debt is already rising rapidly. The Dept. of Education's capacity to more than quadruple it's annual direct loan volume to over $85 billion overnight is questionable. Every dollar lent by the direct loan program is borrowed by the U.S. Treasury.

How Students and Schools Lose Under the Proposal:
Under FFELP, student loan providers do more than just offer student loans; they offer quality services to the borrower and to institutions of higher education. These institutions often list the high quality of loan servicing available in the FFELP, e.g., as among the program’s greatest assets. In fact, the clear majority of schools have been committed to FFELP because they have found it to be better for their students who benefit from its choice, competition, benefits and high quality of service. Nonprofit and state-based student loan providers in particular offer a myriad of valuable services not widely available through the DL program:

College awareness programs
Scholarship, grant and loan forgiveness programs
Financial aid seminars
Debt management and financial literacy workshops
Community-based financial literacy information and college planning programs
Default aversion tools/counseling

In FFELP, private, nonprofit and state-based student loan providers compete on price and service, allowing students and families to benefit from the power of competition. These lenders offer federally guaranteed student loans, often with discounted or paid origination/default fees and/or interest rates, providing students with the ability to shop around for the best deal for their particular circumstances and to borrow from the provider of their choice. This choice and competition are another aspect of FFELP that schools appreciate on behalf of their students. Shouldn't we all have the right to CHOOSE who we borrow money from?

How Taxpayers Lose Under the Proposal

College tuition has inflated over 215% over the last 4 years, federal student loan volume continues to increase significantly each year. FFELP loans are financed with private sector capital while DL loans are financed with Treasury borrowing. Forcing all federal student loan volume through the same Government channel would dramatically increase Treasury debt. Originating all loans through the DL during the next five years would require roughly one-half trillion dollars in new Treasury borrowing during that span alone. That increase in the national debt is sufficient to raise the cost to the Government of ALL new Treasury issuance. The cost of that incremental increase in interest cost on the debt is NOT scored in the federal budgetary cost of the DL, which is thus underweighted relative to its true economic cost.

The programmatic risk of transitioning completely to DL is also significant. The DL has experienced in the past a complete shutdown of its consolidation loan program – requiring FFELP providers to temporarily take all of the applications. If there are no FFELP providers waiting in the wings, the programmatic risk of such a shutdown becomes enormous.

Congressional Commitment to FFELP Should be Maintained!

Over the last year, in an effort to ensure students continue to have access to FFELP loans during the current capital market downturn, the 110th Congress made a commitment to the FFELP took the following steps:

In May of 2008, Congress passed H.R. 5715, the Ensuring Continued Access to Student Loans Act (ECASLA). Along with increasing loan limits, the legislation granted the Secretary of Education the authority to buy student loans from lenders. H.R. 5715 allowed students to continue to be able to access low-cost FFELP loans regardless of problems in the credit market.

H.R. 6889, an extension of ECASLA, was passed by Congress. The legislation extended the authority of the Secretary of Education to purchase new Stafford and PLUS loans made for the 2009-2010 academic year, allowing time for the credit markets to stabilize and for lender yield levels to be reevaluated.

Also under the ECASLA authority granted by Congress, the U.S. Department of Education further attempted to strengthen the FFELP marketplace by supporting an Asset-Backed Commercial Paper (ABCP) conduit and a short-term loan purchase program.

In short: The Federal Govt already determines the interest rates for FFELP loans, not the lenders. The Federal Govt then charges the lenders with increased special allowance fees, lender fees, excess interest fees, and so on that we are barely able to keep our doors open for our students. Lenders are dropping out left and right because of this. Just because there are a few "bad seeds" in the bunch - doesn't mean that we are ALL greedy lenders out to take your first born. The interest on an FFELP loan may be 5.6% - but after the lender pays the govt fees, truely and honestly we get to keep around 1.3%. With ANY loan you take out, there will be interest. (Oh and by the way Mr. Collinge, OUR default rate is 3%.)

Freedom of choice...isn't that the "American way"? Our choices are slimming, the Govt has their hands in our mortgages, our banks, and soon our healthcare and student loans. Isn't it ironic how we used to read about socialism in textbooks and now it's in the morning newspaper?